11/17/2014

It's an interesting fact that the reason most entrepreneurs and CFOs don't have a financial forecast for their company is the fear that their forecast might be wrong.

In part 1 of this post, I shared that as a longtime CPA and CFO, I understand the almost hardwired concern about being right when it comes to providing financial information (both historical and forecast).

The good news is there are two very powerful ways for you to get past the fear of being wrong when forecasting.

Start your forecasting process but don't share it with anyone… yet.

Summarize the results of the forecast at a high level… and use a range.

In this post, I'll talk in more detail about the first way to get past the fear.

Create Your Forecast But Don't Share It… Yet

The single biggest step you can take to overcome the fear of being wrong is to create your first forecast and don't share it with anyone yet. That way you get your forecast process started (which is half the battle in starting anything new). And you eliminate any criticism if it isn't perfect because no one will even see it at this point.

Don't be fooled if that prescription sounds overly simplistic.

It's a common sense, logical method that I have used with great success over the years. It overcomes our natural tendency toward inertia when starting something new. And it eliminates the fear of being wrong.

For Your Eyes Only

Basically, you are going to start by creating the forecast "for your eyes only". Not forever, just at the very beginning to get the forecast process started.

So that means:

Don't try to sell the CEO or the leadership team on the value of having a forecast

Don't talk to them about the assumptions or specifics as you create the forecast

Don't send the results of the forecast to them

You can skip those parts of the process initially and get right to creating your first forecast. As you get started, keep these principles in mind:

Keep the forecast high level (it's a top down rather than a bottom up process). You should have the forecast completed within one week of starting it.

Forecast each of the next six months (an income statement, balance sheet and statement of cash flows). Six months is a short enough period to keep the process fairly simple.

Use forecast software (if you start with a homegrown spreadsheet you will end up trying to use it going forward). The problem with spreadsheets is they become way too clunky and difficult to maintain. And the forecasting process dies as a result.

The beauty of getting started on your first "for your eyes only" forecast is you get to taste the benefits of financial forecasting without worrying at all about what others might think or if your numbers might be "wrong".

You are giving yourself permission to learn and experiment at this beginning stage.

You Get the Benefits

Even without sharing the forecast results initially, you still get to experience the benefits of the financial forecasting process. The benefits are you get to:

Become intimately familiar with the strategy and direction of the company

Identify the key drivers of financial performance

Reduce the risk of error in the historical financial statements

Compare actuals to forecast each month to learn what parts of your forecasting process are working well and which need some work or fine tuning

Create insights about past and future financial performance

Think through ways to simplify the forecast process

Consider the best way to present the forecast when the time is right so that it is easy-to-understand

After running the forecast process for three months, you will become much more confident and knowledgeable about the benefits and the approach. You will know firsthand where the landmines are that you need to avoid. You will have a better sense of the kinds of strategic and monthly decisions that the forecast can influence and help improve.

Getting Started is Fun… and Rewarding

This approach puts you in a powerful position. It sets the stage for you to enhance your personal influence and credibility in the company.

"In 1922 Thomas Edison predicted that "the radio craze… will die out in time." Of course he was wrong; most forecasts are.

When asked to construct a forecast, the fact that most are wrong is perhaps the hardest concept for most people to come to terms with. Everything we have been taught conditions us to believe that right answers are good and wrong answers are bad, yet when faced with developing a forecast, the odds are stacked against us.

Getting over the fear of being wrong is the first step toward developing a best practice forecasting process."

A reliable forecast is about helping you make better and faster decisions that can help you drive profitability and cash flow higher. It requires that you think strategically about how you present both the objectives of the forecast and the results.

Here is another quote from David Axson:

"First and foremost, the process of forecasting can be an invaluable aid to making decisions. As Peter Schwartz comments in his discussion of scenario planning, The Art of the Long View, "The end result… is not an accurate picture of tomorrow, but better decisions about the future."

Many companies fail to understand this crucial insight. The real value of a forecast is not the accuracy of the answer but the insights into how current decisions and future events interact to shape performance.

The forecasting process serves as a vehicle to increase management's confidence in the decisions it makes by taking a rational view of the most likely future outcomes based on currently available information."

11/03/2014

We all have problems that need solving. We all have challenges or roadblocks that keep us from growing our profitability and cash flow faster.

Some of us (especially me) try to solve problems analytically. Others try to solve problems in a more creative fashion.

Dr. Caneel Joyce has an approach that is both surprising and effective no matter what problem you are trying to solve and regardless of how you are naturally wired.

The Thriveal Podcast

Dr. Caneel Joyce was a guest on episode 36 of the Thrivecast with Jason Blumer and Greg Kyte in June 2014. It was fantastic information presented in an action-oriented, "here's exactly how you to do it" format. I loved it.

She has a PhD in Organizational Behavior from the Haas School of Business, UC Berkeley. She says:

"My life is a dance between right brain and left brain. I spent the first half of my life as an actress and artist. After the dot com bust, I dove into more analytical approaches to business, creative strategy, and product innovation. Working with startups and product teams gives me the most irresistible blend of creative and insight-driven strategy."

Constraints Lead to Effortless Creativity

What fascinates me about Caneel's approach is her view that putting limitations around things helps you create ideas.

"Limitations, or constraints, help you unleash the creativity inside you and inside your team."

It is totally counterintuitive. But I have to come to believe it is absolutely true.

"Freedom is often associated with creativity, yet recent work in the decision making literature suggests that too much freedom can be paralyzing when it provides too many choices."

She also shared on the podcast some interesting ways to look at or define an idea.

An idea should be something somebody can say no to like "no, I don't like that". If everybody likes your idea, it's not an idea.

An idea should eliminate certain courses of action.

An idea is a directional concept that eliminates some potential courses of action, and illuminates some other courses of action.

An idea should send you down a certain path, and close some other doors.

The Five Step Approach to Solving Problems (and Becoming More Creative)

On the podcast, she led a fun discussion on a five step approach to solving stubborn problems.

Define an important problem you want (or need) to solve. Write down a problem you want to solve in your business. Maybe you want to find a way to double sales. Or you want to sell to a new customer segment. Maybe you have a serious problem or threat facing your business and you don't know what to do about it. Write down the problem.

Create some crazy constraints. Crazy time limits are one of her favorite ways to crank up the creative process. The next constraint is to "playfully" think of five different categories of ideas to consider that might help solve the problem. One category might be ideas you could be arrested for. One category might be ideas you can't afford. Then set a crazy time constraint. For example, you have three minutes to list ideas in each of the categories you choose. The purpose of the crazy constraints is to force your brain to examine ideas and concepts in a new and different way.

Start writing. Now it's time to start writing ideas in each of the five categories you've chosen. You have three minutes for each category so keep your pen moving. Take a one minute break between each category. No big thinking. No planning. No judging yourself. Once you're done you've completed what Caneel describes as five "ideation sprints".

Find the intersection of interesting and smart. Read the ideas you wrote down and put a star next to the ones that seem interesting to you. Not good, interesting. (And you know it's interesting when you read it and you get a little bit nervous.) Now read the list again and circle the ideas that sound smart. What you're looking for here is an idea that is both interesting and smart.

Go a little deeper. Select three of the ideas, preferably the ones that you consider both interesting and smart, and write a one pager on each of the three ideas. You are basically describing those three ideas in more detail. It can still be a little messy. You're trying to see if you have the "brain juice" to turn your ideas into reality. It helps you determine if you want to create an action plan to make it happen.

Necessity is the Mother of Invention

At the heart of her approach is the old saying that "necessity is the mother of invention". The constraints drive necessity… and your creative juices flow from there.

Give it a try with your team on a problem that, if solved, could unlock an exciting path to dramatic increases in profitability and cash flow.